RIVER ROAD SHOPPING CENTER, INC. v. SCOTT, et al.

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subject to formal revision. If you find a typographical error or
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RIVER ROAD SHOPPING
CENTER, INC.

v.

SCOTT, et al.

January 14, 2000

Record No. 990225

RIVER ROAD SHOPPING CENTER, INC.

v.

GEORGE ROSS SCOTT, INDIVIDUALLY

AND TRADING AS OUTDOOR TRADERS

OF VIRGINIA, INC., ET AL.

FROM THE CIRCUIT COURT OF HENRICO COUNTY

OPINION BY JUSTICE ELIZABETH B. LACY

Present: All the Justices

Joseph F. Spinella, Judge Designate

River Road Shopping Center, Inc. (RRSC) appeals
a judgment holding that it was not entitled to recover damages
from sureties on a lease because it did not mitigate its damages.
Finding that the lease terms bound the sureties and allowed the
damages sought by RRSC, we will reverse the judgment of the trial
court.

RRSC owns and operates a retail shopping center
in Richmond. On January 21, 1988, RRSC executed a ten-year lease
with Outdoor Traders of Virginia, Inc. (Outdoor Traders) for
retail space in the center. George and Nancy Scott were the sole
officers, directors, and shareholders of Outdoor Traders. The
Scotts individually joined in the lease as sureties.[1]

In June 1990, the Scotts decided to terminate
their retail business in the leased premises and contacted RRSC
for assistance in finding a sub-tenant for the space. In December
1990, Outdoor Traders assigned the lease to Lavelle-Martin, Inc.
In the assignment of the lease, the Scotts reaffirmed their
responsibility as "Guarantors of Assignor." RRSC
consented to the assignment on the condition that the Scotts as
"Guarantors" under the lease "remain fully liable
as if this Assignment of Lease had never been executed,
throughout the initial term thereof."

Lauralee Lavelle-Martin and Kissel Martin,
husband and wife, owned Lavelle-Martin, Inc. and began operating
a children’s clothing store in the leased space. Lavelle-Martin,
Inc. was delinquent in rent payments in 1994 and early 1995.
Delinquency notices were sent to Lavelle-Martin, Inc. The Scotts
were also notified of the delinquencies. In June 1995, Mr. Martin
caused a sheriff’s levy to be conducted on the leased premises to
recover a money judgment he had obtained against the corporation.
Lavelle-Martin, Inc. ceased business operations and stopped
making rent payments. RRSC did not notify the Scotts of
Lavelle-Martin, Inc.’s default.

Mr. Martin offered to re-lease the premises
from RRSC under the same terms as those contained in
Lavelle-Martin, Inc.’s defaulted lease, but RRSC rejected this
offer. RRSC executed a new lease with Jack Kreuter Jewelers, Inc.
Although based on the prevailing commercial real estate rental
rates, the lease payments under the new lease were lower than the
payments under the defaulted lease.

Based on Article XII of the defaulted lease,
RRSC filed a motion for judgment against the Scotts to recover
approximately $64,000, which represented the difference between
the rent due under the defaulted lease and the rent received
under the Kreuter lease. RRSC also sought reasonable attorneys’
fees and interest. In their grounds of defense, the Scotts
admitted that they were sureties on the defaulted lease, but
denied any liability to RRSC. The Scotts affirmatively alleged
that RRSC’s actions in failing to inform them of the default by
Lavelle-Martin, Inc. and in refusing Mr. Martin’s offer to
re-lease the premises were so injurious to the Scotts that such
actions released the Scotts from their surety obligations on the
lease.

Following an ore tenus hearing, the trial court
granted the Scotts’ motion to strike RRSC’s evidence and entered
judgment in favor of the Scotts. The trial court found that by
refusing Mr. Martin’s offer to re-lease the premises at the same
rental rate as that contained in the defaulted lease, RRSC failed
to mitigate its damages. We awarded RRSC this appeal.

RRSC asserts that upon the tenant’s default,
Article XII of the defaulted lease authorizes the landlord to
re-let the premises "under such terms and conditions as
Landlord shall deem reasonable to any tenant or tenants which it
may deem appropriate." This provision authorized RRSC to
execute a new lease when Lavelle-Martin, Inc. defaulted on the
prior lease and the new lease could contain any terms deemed
reasonable by RRSC. Therefore, RRSC argues it had no duty to
mitigate damages and the trial court erred in imposing such a
requirement.

The Scotts do not disagree with RRSC’s
interpretation of Article XII but contend that Article XII is not
part of their surety agreement. Rather, the Scotts assert that
the sole terms of their surety agreement with RRSC are contained
in Article XXIV and that in that article the Scotts only agreed
to guarantee the "affirmative obligations of the
Tenant," which, according to the Scotts, limits their
obligation to promptly paying the agreed upon rent. Other than
this express obligation, the Scotts assert that no other
conditions contained in the lease applied to them. The terms of
their surety agreement with RRSC are governed by principles of
surety law, according to the Scotts, and under those principles,
a surety is discharged "by any change in the
obligation underlying the bond." Board of Supervisors of
Fairfax County v. Southern Cross Coal Corp., 238 Va. 91, 94,
380 S.E.2d 636, 638 (1989). The Scotts conclude that because RRSC
took steps to change the obligation underlying the agreement with
the Scotts by refusing to accept Mr. Martin’s offer, they are
released from their surety obligation.

The [Scotts] join in this lease, as an
inducement to Landlord to lease the demised premises to Tenant,
for the purpose of jointly and severally guaranteeing to Landlord
the punctual payment of all rent due hereunder and the due
performance of all the other terms, covenants and conditions
contained in this lease on the part of Tenant to be paid and/or
performed thereunder, including but not limited to all damages,
expenses and attorneys’ fees that may be suffered or incurred by
Landlord as a result of the nonpayment of rent or nonperformance
of any other terms, covenants and conditions.

This article does more than obligate the Scotts
to assure the prompt payment of the rent. The article also
provides that the Scotts guarantee payment of "all damages
. . . suffered or incurred . . . as a result
of the nonpayment of rent or nonperformance of any other
terms." Thus, if the landlord incurs damages because of the
tenant’s nonperformance, the Scotts are liable for those damages.
The Scotts’ liability is limited, however, to damages that, under
the terms of the lease, can be recovered from the tenant for
non-payment of rent.

Article XII prescribes a measure of damages
recoverable by RRSC for nonpayment of rent. The article allows
the landlord to re-let the premises upon the tenant’s default at
"such rental and upon such terms and conditions as Landlord
shall deem reasonable," and authorizes the Landlord to
recover from the tenant in the event of default, "all
rentals . . . required to be paid by Tenant under this
lease, less the rent, if any, collected by Landlord on reletting
the demised premises." Therefore, the landlord can recover
as damages any unpaid rental amounts less amounts received for
re-leasing the premises on terms considered reasonable by RRSC.[2]

We conclude that the surety agreement between
the Scotts and RRSC imposed liability on the Scotts for damages
sustained by RRSC upon the default of Lavelle-Martin, Inc. in
accordance with the terms of the lease. The damages sought by
RRSC were consistent with the damages allowed under the lease for
non-payment of the rent. Therefore, the trial court erred in
striking RRSC’s evidence because RRSC failed to mitigate its
damages. We will enter judgment here in favor of RRSC in the
amount of $56,738.36, and remand the case to the trial court for
further proceedings regarding attorneys’ fees and costs.

Reversed and remanded.

FOOTNOTES:

[1]The lease refers to
"Guaranty" and the motion for judgment stated that the
Scotts "guaranteed" the obligation of Outdoor Traders.
However, at trial the Scotts asserted and RRSC agreed that the
Scotts were sureties, not guarantors.

[2]The Scotts do not argue that
RRSC’s action in re-letting the premises was unreasonable under
the terms of the lease; rather they only argue that this
provision does not apply to them as sureties.